Know Your Broker (Part I) – Server Location, latency in execution

Know Your Broker (Part I) – Server Location, latency in execution

Self-Trading Retail Traders, Money managers and Introducing Broker have a difficult choice to make among more than +1,000 Brokers globally. There are many parameters and things to look at when choosing the right Broker like: regulation, reliability & stability, overall trading conditions offered (spreads and commissions), leverage, customer & relationship support, products supported, platforms, connectivity possibilities etc. the list is long…

We don’t argue that the above are all very important things to consider when choosing a Broker, but what we would like to concentrate here, is to look at the actual trading execution quality, which very much remains hidden for the traders. If you are pleased with the trade execution of your Broker then you can step on this as a fundament to proceed and further build your future relationship with them. You can further negotiate all of their commercial terms as you grow your business. We would like to share our experience with you, on what exactly to look for under the Broker’s hood. What is their structure and business model, and what exactly happens with your order after you press the ‘buy/sell’ buttons. This will help you to better understand, track and optimize the ‘hidden costs in trading’ like Slippage, Rejections and Execution speed, Accuracy etc.). To large extend the Brokers themselves and their Sales teams wouldn’t share such details with you, as they may not be very comfortable of you knowing such information and details about their operations.

Server Location, latency and proximity. Why is this important…?

Brokers have to ensure they have up to date accurate pricing feeds delivered to the Clients Trading Terminals at all times. All Traders need to submit electronically their orders to the Brokers and Brokers to execute their orders and trades following their best execution policy. Brokers have to also send these to their Liquidity Providers (LPs) for execution or to work these orders in certain ECN (if they at all use any). Of course many brokers will simply B-book the flow inside their MT4 severs without the need to hedge the flow to their liquidity providers (we will look on how to detect such Brokers in our next newsletter). Here we will only be looking into the operations of the Brokers who hedge 100% of their client trades in a STP/DMA manner (brokers who run A-book execution)

If Brokers wish to provide good and quality service to their Clients, they need to connect and execute their client orders to the closest possible proximity of the Liquidity Providers, who make markets in FX. All tier 1 market makers (Banks and Non-banks) as well as execution venues and matching engines like ECNs (Electronic Communication Networks) have their pricing engines located in the 3 major centers: London (LD4 – Equinix data center ), New York (NY4), and Tokyo (TY3). There are about 20 true tier 1 LPs, who have invested and continue to invest millions in their price formation models, matching engines and algorithms, running in ultra-low latency environment. These LPs usually are cross connected to each other in an ultralow-latency environment in specialized data centers. Equinix is known as providing and facilitating the data centers where all tier 1 LPs and ECNs venues are connected. Equinix also invested (and continue to do so) millions in ultra-low latency infrastructure connecting all their global data centers into a financial ecosystem. There is no real FX liquidity and active market making in global major FX pairs that is done out of: Russia, Australia, Dubai, Europe, Germany, Hong Kong, Singapore, China, Africa, South America etc. Even if there are some local strong players in local currencies, these would still rely heavily on low-latency lines to the above 3 Liquidity hubs where they will connect and execute big portion of their flow. Firms who host their trading and pricing infrastructure outside the 3 liquidity hubs, will always be no very well prepared and to handle heavy high frequency trading (HFT) strategies, pricing and latency arbitrage strategies etc..

Ask your Broker the following questions:

Who do they use as their Liquidity Providers?

How and from where their liquidity is being formed, from which data center do they connect to their LPs?

Where does your Broker host their trading servers, what are their IP addresses?

You do not want to be in the following situation, do you.. ?

A full time Trader (or Money Manager) connecting from Hong Kong, while your MT4 server of your Broker, is hosted in a data center in New York, while liquidity is sourced and executed with London based LPs…. The quotes you’ll see and execute on, would be minimum 300ms old, your orders will be flying across the Globe, you will have imbedded latency when executing your orders, that result in higher slippage or more rejections. Your connection will not be stable and maybe dropping constantly.
Even if the Traders moves their connection closer to the actual MT4 server of the Broker in NY and use VPS provider (Virtual Private Server), that would still not give them optimal execution, if the Broker is not sourcing and connecting to the right local liquidity streams, close to the liquidity hubs.

Here are few simply ways on what you can do to verify and test your Broker:

Brokers may use data centers in order to optimize traffic in local hubs and then route the traffic to the main trading server. As an example Clients from inside China, would connect to locally hosted Data Center server in Hong Kong, while actual MT4 trading server used by the Broker might be hosted in New York… Clients trading from China would be much better off they connect and execute in Asian liquidity hub in Tokyo (TY3)

Identify where are the actual trading servers of your Broker.

You can quickly check your MT4/MT5 Broker servers and where these are hosted by using:

Simply type your Broker name and see the location of their MT4/MT5 servers. Metaquotes can provide you with cheap VPS services, but usually this will not be via specialized VPS providers, who are cross connected to the liquidity hubs. Some of the more professional VPS providers can actually provide hosting inside these liquidity hubs with cross connect options to your Broker servers.

Install the MT4 terminal and quickly compare ping and latency to various brokers.

You can also check the ping to the various servers of the Brokers and see where these Servers are actually located. Seems like FXCM and GAIN for example host all their LIVE MT4 servers in NY (seems they don’t have London or Tokyo hosted trading servers) … This tells you that they only use NY based Liquidity Providers for execution.

The Ping that you run in the trading terminal would be the minimum delay you would experience as Trader when connecting to the Broker server. The Quotes you see and orders you execute with that Broker would be at least 100 ms older, vs. a Trader who connects to the same Brokers from New York.

Verify actual LIVE and Demo server IPs, DNS of your Broker.

After you install the Trade Terminal, from your Broker, you can go to Program Files and locate config file for your Broker

Example: C:\Program Files (x86)\FXCM MetaTrader 4\config

Usually you would be able to open the file with Notepad or other text editor. You should be able to see all of the configured and supported MT4 server of your Broker, with their specified IP address or supported DNS. You can ping the DNS and you will see the actual location of their MT4 servers.

The Number of MT4 servers instances and actual IP addresses used by the Broker, can also tell you how big the actual MT4 operations of this Broker is. Usually the more IPs supported would mean much bigger retail operations that the Broker supports. This means that the Broker maybe not so much specializing in servicing more of Institutional type of Clients (money managers, professional HFT EAs/Clients etc..), but their servers are more designed to service large WLC base or broad smaller Retail account sizes spread across many MT4 servers (many IP addresses), where the flow might be primarily b-booked.

Finally when you know IP address or DNS, you can also verify who is the actual owns the registered IP address. This way you can verify if the Broker you use is owning the IP address or a technology provider is involved (and which one), or if another Broker is involved who provider white label services.

Is your Broker operating as stand-alone Broker or they run their services as a White Label?

Have in mind that many Brokers, also operate as White Labels and use the MT4/MT5 technology and servers of other Brokers or Technology providers. If your Broker operate as White Label provided by another bigger Broker, then you can be fairly certain that the actual price formation, liquidity and execution is provided by the larger Broker.

If a Broker operates as white label via a Technology Provider, then such Broker would still need to connect to liquidity for execution. Certain technology providers are truly independent as they do not have any attached Brokerage companies or associated with them. Such companies usually can provide dedicated hosting into the 3 liquidity hubs and specialize in servicing low latency execution by A-book brokers (PrimeXM, OneZero, Gold-I).

Others have built their technology arm in order to service the white label segment, while they still direct liquidity to be sourced from the Brokerage/Prime of Prime part of the company. Such technology providers claim that they are independent but Brokers who use their services can be fairly certain that have been offered some preferential pricing as part of the complete brokerage suite (Leverate Technology and Leverate Financial Services, Forexware and FXDD, Advanced Markets & Fortex, xOpenHub and XTB Brokers, ThinkMarkets, and others )..